Commentary on “Write off Donald Trump and the dollar at your peril” by Ambrose Evans-Pritchard

Ambrose Evans-Pritchard, who writes in The Daily Telegraph (London) published a very interesting article on 6 September 2017, “Write off Donald Trump and the dollar at your peril.” In this article he points out that American corporations have retained a large amount of their foreign earnings outside of the United States, in order to avoid high levels of American corporate tax, and that these sums now total approximately $4 trillion. Apple alone has $257 billion held in foreign accounts, and Google $126 billion.

Donald Trump, is determined to move this money back into the US economy, it is understood that he is preparing mandatory action, as part of his tax revisions. It is also the case that between 80% and 54% of these foreign assets, owned by American corporations, are held in foreign currencies. In order to move these very large sums, back to the United States, the assets held in foreign currencies would need to be converted to US dollars, which could have a profound effect on the operation of international finance and trade, creating a massive demand for the dollar, draining liquidity from offshore markets, and reducing available finance for corporate credit in Asia, Latin America and other emerging markets, the result would be an enormous shock.

As he points out if this happens, it will come at the moment that the US Federal reserve reduces its quantitative easing policies, which in itself will tighten dollar liquidity. Ambrose Evans-Prichard says, “We have the potential for perfect dollars storm … ripping through a global financial system that is more leveraged to the US dollar.” Although over the last few years there has been academic discussion about the decline of the US dollar, this is a long-term, rather than an immediate issue, today the dollar is the undoubted reserve currency from most of the world, the Euro, which has its own internal weaknesses, has not been able to effectively challenge dollar supremacy. Although, some have seen China as replacing the United States, this looks unlikely, in any immediate future, and the Chinese currency, is not fully convertible in the way that the US dollar is. The argument put forward by Ambrose Evans-Prichard, is that if US companies are forced to repatriate large amounts of currency, possibly up to $1 trillion, this will provide excessive stimulus to the American economy, and also have a strong negative impact on emerging economies, particularly in Asia and Latin America.

If we see a strong upward valuation of the US dollar, this will have a negative effect on US exports, but may well cause a resurgence of values on the US stock exchanges, neither of which is in the long-term interest of the United States.

The possibility of repatriation of large amounts of dollars by US companies, as Evans-Pritcard noted, is not the only threat to dollar liquidity in the wider world. A recent article Neels Heyneke & Mehul Daya of Nedbank in South Africa, also pointed to the reduction of available dollars, as the US Federal Reserve takes measures to tighten the money supply. They say that the quantum of money in the system is now equally, if not more important, than the price of money (policy rates). As they stated, “We believe that with the Fed commencing with the unwind[ing] of its balance sheet (September 2017), it will also contribute to the dollar shortage. In our opinion, this will lead to a tightening of global financial conditions, especially for non-US banks who will find it harder to access USDs in the Eurodollar market.”

There has been a perception that emerging markets, for example in the Middle East, still have the appetite to borrow large amounts of dollars for infrastructure development, and in addition there is the enormous privatisation programme planned by the Saudi Arabian government. Saudi Arabia is planning to establish a $2 trillion sovereign wealth fund by selling off part of Saudi Aramco, in addition to privatising other State assets, including water, transport, retail, schools and healthcare. It will be interesting to see how such programmes play out in the event of a serious dollar liquidity crisis; unless American investors have an insatiable appetite for middle eastern oil assets. The Saudi Aramco IPO may be less attractive than was initially thought. Another consequence of a dollar liquidity problem is that other reserve currencies, such as the Euro, Sterling, Swiss Franc, Chinese Renminbi and Japanese Yen, may become more attractive alternatives for financing international trade.